- + Automatic Zoom What is the total holding period return of an asset? Describe

Question

- + Automatic Zoom What is the total holding period return of an asset? Describe the components of this return, giving suitable examples to illustrate. (3 marks) 1. Janine invests $20,000 into a fund and expects to receive $27,000 at the end of the year with probability of 0.2, $23,000 with probability of 0.4 and $18 000 with probability of 0.4 2. Calculate the amount (s) Janine will receive at the end of the year, giving your answer to the nearest dollar. (2 marks) a. b. Calculate the expected return from this investment, giving your answer as a % correct to the nearest 1%. (2 marks)

Explanation / Answer

1) Holding period returns is the total return received from holding an asset or being invested in an asset for a period of tiime. This period of time can be any from a day to more than 10 years. It has majorly two components:

Holding period =

Holding Period Return = Income + (End of Period Value – Initial Value) / Initial Value

For example a stock is bought at $50 and sold for $52 at the end of 6 month. It pays a dividend of $3 in that time period. Therefore holding period return for 6 month shall be :

($3+($52-$50))/$50=$5/$50=10%

2)

Hence Janine will receive $21,800 at end of the year

Return percentage shall be =(21800/20000)-1=9%

Probability Return Product 0.2 $ 27,000.00 $   5,400.00 0.4 $ 23,000.00 $   9,200.00 0.4 $ 18,000.00 $   7,200.00 Total return $ 21,800.00

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